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Sunday, 12 March 2017

Treatment of Partners’ capital

Each partner contributes capital to the business and shares in the profit (or loss) of the business. The capital of each partner must be identified separately. The capital of each partner is usually contained in two accounts.
  •   Capital account 
  •  Current account 

Capital account 
The partnership agreement usually specifies that each partner must contribute a minimum amount of ‘fixed’ capital and that partners cannot draw out any of their fixed capital. In addition, each partner might retain some of his or her share of accumulated profits in the business. 
The partnership agreement should allow partners to draw out their share of accumulated profits, if they wish to do so. The capital account records the fixed capital or long-term capital of the partner that the partner must retain in the business and cannot take out in drawings. The balance on this account does not change very often. 


Current account
A current account is used to record the accumulated profits of the partner and the partner’s drawings. 

  • The profits of the business are shared between the partners. The share of each partner is credited to (added to) his or her current account. 
  • Each partner may take drawings out of the business. Drawings are a withdrawal of profit. These are recorded by debiting the current account of the partner (and crediting the Bank account). 

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